Analyst vs. Trader vs. Risk Manager

In the
interbank market the Analyst, the Trader and the Risk Manager are divided into
three distinct roles.

The analyst
is responsible for understanding the impact of fundamental data and the
technical picture, with a goal of getting the direction correct.

The trader
is responsible for implementing trades that are in alignment with the analyst's
view, and for managing open positions using a combination of prudence and
market knowledge. They will decide what levels they want to be in and out
at.

The risk
manager is responsible for making sure position sizes are in alignment with the
objectives of the desk, that correlations are kept under control, and that the
firm is not over-exposed going into high volatility news events.

This distinction between
roles is critical

It is hard
for the analyst to remain objective if she has a position on. Or when a trader
makes up their own risk management rules it usually ends up in disaster.

This is a
challenge for the new breed of retail trader whom needs to be part analyst,
part trader and part risk manager, as well as having to be their own overall
business manager - in the interbank market there is a floor manager who is
there to make the different parties play nice (or to fire those that don't
perform their role effectively), a luxury the retail trader does not have.

Segment your activities

To help
deal with the challenge, you may find it useful to segment your activities
along the lines of these three different roles.

Your
analysis time should be kept separate from your trading time, and should allow
for an objective assessment of the market, including the positions you have on
as a trader. If you start trading at the same time as you analyse the markets,
you are likely to get excited and place trades without properly stalking a
low-risk entry point.

Your risk
management plan should be developed well in advance of your trading time. The
nice thing about risk management is that it is a solvable mathematical problem.
It just takes time and thought to make sure your risk management rules are in
alignment with your objectives.

You might
find it helpful before you start placing trades to imagine that your risk
manager has handed you your allocation (and notes on key events) - and that if
you break these rules today, the floor
manager will fire you.

When
trading, you can forget about analysis - that should already be done. You
should also know exactly how much you are trading. You are simply waiting for
your entry conditions to appear, so you can implement the trade(s). You are
then monitoring for changes in the market type, levels where the price could
reverse, and for events that could change the outlook for the trade. You also
conduct prudent risk management activities to protect profits made.

All team members are just
as important as the others

While the
trader may want to be the star, their goal is to book the profits for "the
team".

Traders are
a functional cog in a larger trading organization that requires each part to
work in sync. This is true even if, in the case of the retail trader, that
organization is only one person.